Financial industry players are more concerned about crypto than climate change

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On November 8, the Federal Reserve released its latest financial stability report.

The report highlights a series of vulnerabilities in the financial sector, including a section on stablecoins, comparing their risks to money market funds.

Referring to a separate report from the President’s Task Force released last week, the Fed’s assessment was as follows:

“Some stablecoins, including large ones, promise to be redeemable at any time at a stable value in US dollars but are, in part, backed by assets that may lose value or become illiquid. If the backing assets a stable coin lose value, the issuer may not be able to honor redemptions at the promised stable value.”

Yesterday’s report also featured two surveys of industry participants, one conducted in the spring and one in the fall, asking them to name potential shocks to financial stability.

Source: Financial Stability Report, Federal Reserve, November 2021

The spring survey found cryptocurrencies/stablecoins in ninth place, based on the number of quotes from these market participants. In the fall, it had risen to fifth position, just above climate concerns.

The same period also saw a rise in fears of US-China tensions and threats to China’s property sector – propelled to the headlines by Evergrande’s debt crunch.

The issue of stablecoin support has become a major bone of contention among US regulators. The PWG report called for greater statutory authority in Congress, including a new requirement that stablecoin issuers must, in fact, be banks. But this report also threatened the Financial Stability Oversight Council (FSOC) to designate stablecoins as systemically important payment, clearing and settlement activities, which would open up the possibility of regulatory oversight.

The overlaps between the Fed, the PWG and the voting members of the FSOC are growing. Fed Chairman Jerome Powell sits on the PWG as well as the FSOC, alongside Treasury Secretary Janet Yellen, herself a former Fed chair. Acting Comptroller of the Currency Michael Hsu also participated in the PWG report and, before joining the OCC earlier this year, was also at the Federal Reserve.

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